By Stelios Orphanides

Granting pay rises to public sector workers next year, four years after Cyprus sought a bailout and saw its banking system collapse, may be the last thing Cyprus needs while its sovereign rating is below investment grade, an official at a business group said.

“The public wage bill rose to 15.8 per cent of gross domestic product,” Michalis Antoniou, director general at the Employers and Industrialists Federation (OEB) said in a telephone interview on Thursday. “If it has been corrected, do I really need to take it back there?”

Antoniou’s comments came a day after union officials said Cyprus’s return to growth allowed for pay rises in the public sector. “In the context defined by the collective agreement, i.e. the differentiation of the wage bill in accordance to the nominal GDP, it grants us the right and we raised demands for further wage improvements,” said Andreas Ilia, an official at OIO SEK, according to the Cyprus News agency.

Ilia, whose union represents workers in state-owned companies such as power producer Electricity Authority of Cyprus or CyTA, the Telecommunications Authority of Cyprus, was commenting after meeting Finance Minister Harris Georgiades.

Antonis Neophytou, an official of SIDIKEK PEO, said that his union was opposed to regulating pay rises in the public sector per law. “It’s very important and it is something we can do in the context of the agreement we reached and will soon be signed,” Neophytou was quoted as saying.

The government is pushing a package of draft bills to reform the public sector which also includes a bill which bans granting pay rises exceeding economic growth rate. The bills, submitted to the parliament more than a year ago, are still pending.

Already, the phasing out in December of an extraordinary levy on salaries and a general freeze on wages and hiring in the public sector imposed as part of Cyprus’s fiscal consolidation efforts already before Cyprus signed its bailout, led to a gradual drop of the public wage bill to €2.2bn last year or almost 13 per cent of economic output from the all-time peak of €2.9bn in 2011. According to the government’s fiscal policy strategic framework which stipulates the budget policy in 2017 to 2019, the public payroll is expected to remain virtually unchanged this year before it rises 3.7 per cent to €2.3bn next year as public sectors workers will receive an incremental pay rise.

Harris GeorgiadesFinance Minister Harris Georgiades said that the government cannot offer pay rises in addition to the scrapping of the extraordinary contribution, with a fiscal impact of €80m, and incremental pay rises, granted to civil servants according to their years in service.

The government is projected to generate a fiscal policy of 0.4 per cent of economic output in 2016 before posting a fiscal shortfall of 0.6 per cent next year, compared to deficit of 1 per cent in 2015.

Cyprus’s economy exited recession last year and expanded 1.6 per cent. It is projected to grow a revised 2.7 per cent this year compared to a growth forecast of 2.5 per cent in 2015. Public debt is projected to fall to 105.6 per cent this year from 108.9 per cent in 2016 before falling to 101.7 per cent in 2017.

“If a cap in pay rises is introduced, this does not mean that we need to increase wages in that measure,” Antoniou, the director of the business group OEB said. “Is the country’s most urgent priority to give pay rises now? Is there no other way to use primary balances?”

Antoniou advised that Cyprus should use its primary budget surpluses to help consolidate growth either with tax breaks or investment incentives in an attempt to reduce unemployment and narrow the gap separating wages in the public sector from the private sector. “What’s most important, is that more people find work, not that those who do have one to get a pay rise,” he said.

Cyprus’s unemployment rate which is expected to fall to a 2016 average of 13.5 per cent, is expected to fall to 12.5 per cent next year.